Foundries' 28-nm capacity build keeping Applied in the black

Applied Materials' fiscal second quarter showing was driven largely by strong sales to foundries that are scrambling to add 28-nm capacity.

Semiconductor and solar panel production equipment vendor Applied Materials posted decent results for its fiscal second quarter, beating analysts' expectations with sales of $2.54 billion. But Applied's numbers for the quarter—including its $289 million net income—were driven almost exclusively by strength in its semiconductor equipment business, while the business environments for both its display and solar production equipment businesses remained weak.

In a conference call with analysts following the company's quarterly report Thursday, Michael Splinter, Applied's chairman and CEO, said "robust" foundry spending buoyed the company's fiscal second quarter, with strong sales of front-end and implant products. Splinter said sales to foundries have made up almost 60 percent of Applied's revenue for the first two quarters of the company's fiscal 2012. Leading foundries have been aggressively ramping new production at advanced nodes, Splinter said.

"We believe foundry investment will be maintained in the second half of 2012 and distributed over a broader base of customers," Splinter said.

Availability of 28-nm capacity has been an issue for leading-edge chip suppliers, including Qualcomm and Nvidia, both of which acknowledged that tight supply at 28-nm cut into their sales in their most recent quarters. Qualcomm said last month it had engaged other foundries—presumably Globalfoundries, UMC and Samsung—because of tight supply at 28-nm. Also last month, TSMC Chairman and Founder Morris Chang acknowledged that the foundry giant did not have sufficient capacity to meet demand at 28-nm, but said he thought the worst of the capacity crunch was over.

Splinter said Thursday that supply of 28-nm capacity is still constrained. He said the 28-nm ramp was about 50 percent faster than the previous-generation ramp to 40.45-nm. "We think [demand for] 28-nm is going to be strong through the year," Splinter said. "It's going to be strong into 2013. Assuming that our customers can find a place to put equipment, they'll continue to add equipment as quickly as they can."

But while foundry spending in particular is keeping sales strong for the largest portion of Applied's revenue, its Silicon Systems Group, the outlook for Applied's other businesses appears far less rosy. Splinter said sluggish television sales and excess solar manufacturing capacity were hurting the firm's display and solar production tool sales, respectively.

Last week, Applied announced details of a restructuring of its solar business, including cutting about 250 jobs and moving production of some tools from Switzerland to Asia. The company said the actions were part of its plan to reduce the breakeven point for its Energy and Environmental Solutions (ESS) to about $500 million.

Applied said Thursday that sales of its display tools increased 29 percent sequentially in the fiscal second quarter to $134 million. Display sales were above Applied's sales target due to earlier-than-anticipated tool sign-offs, according to George Davis, Applied's chief financial officer. Display orders increased to $84 million in the quarter, Applied said.

Sales for Applied's EES group declined to $79 million in the fiscal second quarter, while orders nearly doubled to reach $62 million, reflecting what Davis called "very low levels of demand."

Splinter said Applied remains confident in the long term potential of the EES business, but said the company was scaling back its development program for equipment to make light-emitting diodes significantly. He said Germany remains the leading consumer of photovoltaic panels and has once again delayed its feed-in tariff reduction. He said demand in the U.S., China and Japan is also accelerating.

Splinter said that as manufacturing costs continue to fall, Applied was beginning to see the "economics of solar" working even in markets where no subsidies are offered on solar panels.

Splinter said Applied expects growth in its "non-semiconductor" businesses to resume next year.

The funny thing is that no one saw this coming in December. Management was telling us that we'd have a shutdown in February yet by the time February hit many of us didn't even get to take the weekends off. I am referring to foundries of course.